Sample Chapter

Eco-Advantage

Washington, D.C.: General Electric CEO Jeff Immelt announces a new
initiative, "ecomagination," committing the mega-manufacturer to double
its investment in environmental products-everything from energy-saving
lightbulbs to industrial-sized water purification systems and more
efficient jet engines. Backed by a multimillion-dollar ad campaign,
Immelt positions GE as the cure for many of the world's environmental
ills.

Bentonville, Arkansas: In a speech to shareholders, Wal-Mart CEO Lee
Scott lays out his definition of "Twenty First Century Leader-ship." At
the core of his new manifesto are commitments to improve the company's
environmental performance. Wal-Mart will cut energy use by 30 percent,
aim to use 100 percent renewable energy (from sources like wind farms
and solar panels), and double the fuel efficiency of its massive
shipping fleet. In total, the company will invest $500 million annually
in these energy programs. Moreover, in a move with potentially seismic
ripples, Wal-Mart will "ask" suppliers to create more environmentally
friendly products: A growing share of the fish Wal-Mart sells will come
from sustainable fisheries, and the clothing suppliers will use
materials like organic cotton. The retail giant has also developed a
packaging scorecard to rate suppliers' efforts to reduce waste and
encourage reduced fossil fuel consumption. All of these initiatives,
Scott emphasizes, "will make us a more competitive and innovative
company."

By either market cap or sales, GE and Wal-Mart are two of the biggest
companies in history. Neither company springs readily to mind when you
say the word "green." But these are not isolated stories. Companies as
diverse as Goldman Sachs and Tiffany have also announced environmental
initiatives. As the Washington Post observed, GE's move was "the
most dramatic example yet of a green revolution that is quietly
transforming global business."

What's going on? Why are the world's biggest, toughest, most
profit-seeking companies talking about the environment now? Simply put,
because they have to. The forces coming to bear on companies are real
and growing. Almost without exception, industry groups are facing an
unavoidable new array of environmentally driven issues. Like any
revolution, this new "Green Wave" presents an unprecedented challenge to
business as usual.

NEW PRESSURES

Behind the Green Wave lie two interlocking sources of pressure. First,
the limits of the natural world could constrain business operations,
realign markets, and threaten the planet's well-being. Second, companies
face a growing spectrum of stakeholders who are concerned about the
environment.

Global warming, resource constraints, water scarcity, extinction of
species (or loss of "biodiversity"), growing signs of toxic chemicals in
humans and animals-these issues and many others increasingly affect how
companies and society function. Those who best meet and find solutions
to these challenges will lead the competitive pack.

The science, we stress, is not black and white on all these
issues. Some problems, like ozone layer depletion or water shortages,
are fairly straightforward. The trends are plainly visible. On other
issues-climate change most notably-some uncertainties about the precise
speed and nature of global impacts persist. But the evidence and
scientific consensus are more than strong enough to warrant immediate
action. Indeed, former U.S. vice president Al Gore and the
Intergovernmental Panel on Climate Change (IPCC) received the 2007 Nobel
Peace Prize for clarifying both the importance of this issue and the
need for urgent response.

A broad-based set of players now insists on attention to these issues.
Government, the traditional superpower of influence on corporate
behavior, has not gone away. Far from it. Regulators worldwide no longer
turn a blind eye to pollution. Citizens simply won't allow it. Across
all societies, we see serious efforts to control emissions and make
polluters pay for the harm they cause.

Other actors, however, now play prominent environmental roles on the
business stage. NGOs, customers, and employees increasingly ask pointed
questions and call for action on a spectrum of issues. To give just one
example, Hewlett-Packard (HP) says that in 2007, over $12 billion of new
business depended in part on HP's answers to customer questions about
the company's environmental and social performance. According to Pat
Tiernan, HP's VP of Environment and Sustainability, these new elements
can be a critical part of the procurement decision and, in some cases,
on par with traditional criteria such as price, delivery, and quality.
These customer demands reshape markets, create new business risks, and
generate opportunities for those prepared to respond.

The breaking news is the arrival of a new set of stakeholders on the
environmental scene, including banks and insurance companies. When the
financial services industry-which focuses like a laser on return on
investment-starts worrying about the environment, you know something big
is happening. Wall Street stalwart Goldman Sachs announced that it would
"promote activities that protect forests and guard against climate
change" and pledged $1 billion for investments in alternative energy,
having already bought a company that builds wind farms-which it has
since sold for a large profit. Upping the ante further, Bank of America
(working with Andrew's guidance) announced a $20 billion commitment to
environmental initiatives and Citigroup committed $50 billion soon
thereafter. Acting as a group, many of the world's biggest banks have
signed on to the "Equator Principles," and now the "Carbon Principles,"
which require environmental assessments of major loans. And Wall Street
analysts have become focused on the "carbon exposure" of companies,
believing that those who manage their emissions better than competitors
will be advantaged in the looming carbon-constrained world.

For a painful example of how this one-two punch of natural forces and
new stakeholders can slam a company, just ask Coca-Cola's two most
recent ex-CEOs, Doug Ivestor and Doug Daft. Within the past decade, the
world's largest soft-drink manufacturer faced angry protests in India
over its water consumption, came under pressure to stop using
refrigerants that hurt the ozone layer, and withdrew its flagship
bottled water Dasani from the British market after the supposedly
purified drink failed European Union quality tests. Today, the company
has a vice president, Jeff Seabright, dedicated to water and environment
issues and a chairman, Neville Isdell, as well as a new CEO, Muhtar
Kent, who work closely with the company's Environmental Advisory Board
(on which Dan serves).

THE BUSINESS CASE FOR ENVIRONMENTAL THINKING

We see three basic reasons for adding the environmental lens to core
strategy: the potential for upside benefits, the management of downside
costs and risks, and a values-based concern for environmental
stewardship.

The Upside Benefits

Nobody, not even market-savvy Toyota, could have predicted the success
of its hybrid gas-electric Prius. Given the poor track record of
electric vehicles, this leap of faith was anything but a clear path to
profit. Yet Toyota executives saw potential value down the road, and
they could not have been more correct. After a decade-long research
push, the Prius was named Motor Trend's Car of the Year in 2004,
by which time customers were waiting six months to get their hybrid
cars. While Detroit was nearing bankruptcy, laying off tens of thousands
of workers, and offering "employee discounts" to everybody, Toyota was
raising prices, expanding production, collecting record profits of $13
billion in 2007, and taking the spot of world's largest automaker.

Toyota's green focus is no accident. In the early 1990s, when Toyota
wanted to design the twenty-first-century car, it made the environment a
major theme, ahead of all the selling points that automakers
traditionally used: size, speed, performance, or even ability to attract
beautiful girls or hunky guys. Smart move.

Similarly, BP has rebranded itself as an energy company, preparing to
move "beyond petroleum" and investing in renewable energy. These
companies have figured out that it's better to remake your marketplace
and eat your own lunch before someone else does.

Our research suggests that companies that bring an environmental lens to
their business strategy are generally more innovative and
entrepreneurial than their competitors. They see emerging issues ahead
of the pack. They are better prepared to handle the unpredictable forces
that buffet markets. And they are better at finding new opportunities to
help customers lower their costs and environmental burden. By remaking
their products and services to respond to customer needs, they drive
revenue growth and increase customer loyalty.

The "gold" that smart companies mine from being green includes higher
revenues, lower operational costs, and even lower lending rates from
banks that see reduced risk in companies with carefully constructed
environmental management systems. They also reap soft benefits, from a
more innovative culture to enhanced "intangible" value, employee
dedication, and brand trust.

Scholars and pundits have noted that businesses now face a world where
traditional elements of competitive advantage, such as access to cheaper
raw materials and lower cost of capital, have been commoditized and
whittled away. On this altered playing field, going green offers a vital
new path to innovation and to creating enduring value and competitive
advantage. Nike executive Phil Berry puts it simply: "We have two
maxims. Number 1: It is our nature to innovate. Number 2: Do the right
thing. But everything we do around sustainability is really about number
one-it's about innovation."

The Downside Risks

Inside oil giant Shell, executives use the acronym TINA-There Is No
Alternative-to explain why they do some things. To them, thinking about
how climate change affects their business or caring how stake- holders
feel about the company is no longer optional. It's just a fact of life.
Even through well-publicized problems with local communities and
governments in places like Nigeria, Shell has continued to hone its
stakeholder relations skills. The company spends millions of dollars
working with the people living around key oil and gas projects such as
the massive Athabasca Oil Sands in Alberta, Canada.

As head of Shell's famed scenarios group, Albert Bressand helped the
executive team think about what could hurt the company in the long term.
As he told us, "We are a prisoner of the market ... there are people who
can remove our license to operate."

The idea behind license to operate is simple: Society at large
allows companies to exist and gives them a certain leeway. If
your company oversteps the bounds, societal reactions can be harsh and,
in severe cases, destroy the company. Former partners of Arthur Andersen
learned that lesson at great cost when the accounting giant vanished in
the wake of the Enron scandal. Or remember the case of chemical industry
leader Union Carbide? After the company's 1984 disaster in Bhopal,
India, which killed over 3,000 people, Union Carbide's future fell apart
until finally it was swallowed by Dow.

More pointedly, society's expectations about company behavior are
changing. A company that abuses the local environment can find it
impossible to get permits to expand operations. Regulators, politicians,
and local communities raise fewer barriers for good neighbors.

Heavy industries are especially aware of this social license issue, but
others feel the heat as well. After years of unfettered expansion,
Wal-Mart has come under fire from protestors who contend that the
company's stores increase sprawl, destroy wetlands, and threaten water
supplies. In some communities, regulators have joined the chorus and
begun to impinge on the retail giant's expansion plans. In internal
meetings, Lee Scott told Wal-Mart executives that their sustainability
efforts would help protect the company's "license to grow."

Environmental challenges can seem like a series of small holes in a
water main, slowly draining value from the enterprise. Or they can
appear suddenly as major cracks in a dam and threaten the entire
business. Maybe the problem is unexpected costs for pollution control or
a cleanup for which nobody budgeted. Maybe it's a very public disaster
like the Exxon Valdez. Sometimes, too, the downside of
mismanaging these issues can get very personal. Executives who preside
over the mishandling of toxic waste, for example, can face jail time.

Efforts to cut waste and reduce resource use, often called
"ecoefficiency," can save money that drops almost immediately to the
bottom line. Redesign a process to use less energy, and you'll lower
your exposure to volatile oil and gas prices. Redesign your product so
it doesn't have toxic substances, and you'll cut regulatory burdens-and
perhaps avoid a value-destroying incident down the road. These efforts
lower business risk while protecting the gold-reliable cash flows, brand
value, and customer loyalty, for example-that companies have
painstakingly collected over time.

The Right Thing to Do

Repeatedly during our research we asked executives why their companies
launched environmental initiatives, some of which cost significant money
up front and had uncertain paybacks. More often than you might
imagine-and far more often than we first expected-they said that it was
the right thing to do.

Is the case for thinking and acting environmentally based on values? Not
primarily. At least that's not what we heard from the executives we
interviewed. For most of them, the moral argument was not a separate
imperative. It was deeply intertwined with business needs. Building a
company with recognized values has become a point of competitive
advantage, whether you have 2 employees or 200,000. Doing the right
thing attracts the best people, enhances brand value, and builds trust
with customers and other stakeholders. In fact, it's hard to conceive of
a business asset more central to long-term success than trust among
stakeholders-or one that is more easily lost. As investing legend Warren
Buffett once said, "It takes twenty years to build a reputation and five
minutes to ruin it. If you think about that, you'll do things
differently."

Even those who agree with the late Nobel Prize-winning economist Milton
Friedman that the main "social responsibility of business is to increase
its profits" can't ignore the growing ranks who believe that companies
have an obligation to do more. The logic of corporate environmental
stewardship need not stem from a personal belief that caring for the
natural world is the right thing to do. If critical stakeholders believe
the environment matters, then it's the right thing to do for your
business.

MAGNIFYING FORCES

The Green Wave, with its threats and opportunities, rises within a
business landscape already in the throes of radical change. Companies
face a number of mega-trends that interact with the effects of the Green
Wave, accelerating change and magnifying its impact and scope.

Globalization and Localization

As author Thomas Friedman describes it, outsourcing is just the tip of
the iceberg. The "flattening" of the global markets for goods and
services will disrupt nearly all industries. The continued rise of both
China and India seems likely to have a profound effect on businesses
across the world, especially in North America and Europe.

Economic integration and trade liberalization intensify competition.
Globalization creates opportunities for many, but fundamentally rewards
scale. Size, however, creates suspicion of excess power. Large
enterprises come under extra scrutiny for their business practices,
including environmental impacts.